U.S.: G20 to name countries with problem imbalances soon

Posted on April 12, 2011

By Glenn Somerville and David Lawder

WASHINGTON (Reuters) – The G20 hopes to make progress on developing guidelines to identify economic imbalances this week and will soon be able to list countries with the biggest problems, a senior U.S. Treasury official on Tuesday.

“I do expect a short list of countries to emerge from this process and those countries will be the focus of a second stage of analysis,” the official told reporters at a briefing ahead of a meeting of the Group of 20 rich and emerging-market nations on Thursday and Friday.

The G20 is aiming to develop “indicative guidelines” to detect imbalances such as excessive trade deficits or surpluses and then develop policy recommendations to address them. The official said this week’s meeting will focus on the first stage of the process — the language for identifying imbalances.

The next stage, expected later this year, will involve further analysis of countries identified as having systemically important imbalances to develop potential remedies.

The G20, which includes both rich and developing nations such as China, India and Brazil, is meeting on the sidelines of semi-annual meetings of the International Monetary Fund and World Bank.

The Group of Seven club of developed countries also meets separately on Thursday night, and the U.S. official said they were likely to hold to their long-standing position that “excessive volatility” in currency exchange markets was unacceptable.

The G7 — the United States, Britain, Canada, France, Germany, Italy and Japan — conducted a rare coordinated intervention in currency markets last month after the Japanese yen accelerated sharply in value following the country’s earthquake.

CONTENTIOUS PROCESS

The G20’s aim is to push forward a complex plan to better balance the global economy by finding means to alter policies in response to excessive trade surpluses or deficits.

These imbalances also would fall if all G20 countries allowed their currencies to respond more freely to market forces, the U.S. official said, calling it a key challenge for a diverse group born during the financial crisis of 2008.

Progress toward defining the imbalances has been slow. China at a Paris G20 meeting in February refused to accept the consideration of excessive accumulation of foreign currency reserves as an indicator of possible imbalances.

The U.S. official acknowledged the process will continue to be contentious, saying this is a sign of progress that views are converging on the G20. “I think it is contentious because it is plowing new ground.”

China is the country most regularly associated with excessive trade surpluses and is regularly criticized by both advanced and developing economies for its rigid control over the value of its yuan currency, which holds down the cost of its exports.

But the Treasury official cited a heightened awareness among Chinese officials about the need to rebalance its economy to rely less on exports and more on domestic consumption.

Beijing has made progress in foreign exchange flexibility, with a 4.3 percent nominal increase in the yuan versus the dollar since last June. The official reiterated Treasury’s view that this is a 10 percent increase in the “real bilateral exchange rate” when China’s higher inflation rate is factored in.

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By Glenn Somerville and David Lawder

“We’re seeing some movement there and we expect to see continued movement on that front,” the official said of the yuan/dollar exchange rate.

China is now the world’s No. 2 economy, behind the United States, and many economists say its yuan currency would likely rise 25 percent or more in value if it was not so tightly controlled by the Chinese government. That would make Chinese imports more expensive for American consumers and presumably help shrink the U.S. trade deficit with China.

(Reporting by Glenn Somerville and David Lawder, editing by Dan Grebler and Leslie Adler)